The 10th investigation in the sector in 15 years concluded that there was still a competition problem in the banking industry.
Photograph: Bloomberg via Getty

Proposals to make high-street banking work better for customers have come under fire after the competition watchdog concluded that breaking up the big banks would be too costly and would not end the dominance of the big four. Although the Competition and Markets Authorityset out ideas to force banks to prompt customers to shop around, it faced questions about whether the measures went far enough.

The 10th investigation in the sector in 15 years concluded that there was a competition problem in an industry where Lloyds Banking Group, Royal Bank of Scotland, Barclays and HSBC have a 70% share of current accounts. Challenger banks such as Metro Bank have taken only a 5% share in 10 years, even though switching accounts could save consumers an average of £70 a year. Those with an overdraft could save an average of £140, and those with larger overdrafts would save £260, the watchdog said.

The watchdog rejected calls from challenger banks to end free in-credit banking. Introducing monthly fees or demanding that interest was paid on savings would not solve competition concerns, the CMA said.

Instead, the preliminary findings of the inquiry, which will be finalised next May, focused on ways to encourage customers to switch provider. Customers should be sent text messages to warn them if they were going overdrawn and prompt them to look for better offers. Banks that make mistakes – such as through IT shutdowns – could also be forced to suggest that customers seek better deals elsewhere. Some of these ideas are to be tested on account holders.

Alasdair Smith, chairing the investigation, said: “Banking is a sector of huge importance that affects every household and business in the country. We think customers need to be put in charge of their banking.”

But Richard Lloyd, executive director of the consumer body Which?, expressed disappointment. “The CMA inquiry has to bring about better banking, but these proposals don’t go far enough,” he said. The British Chambers of Commerce – representing the small businesses covered by the review – said the report pulled “many of its punches”.

Jayne-Anne Gadhia, chief executive at Virgin Money, who has argued that free banking hides the charges customers pay, said:“It is estimated that interest forgone cost customers over £3bn in 2013, and we would like to see all banks being required to pay net credit interest on current account balances.”

Andrew Tyrie, chairman of the Treasury select committee, picked up on this point. “Free in-credit banking is a con trick and it is disappointing that the CMA have decided that it should be allowed to continue,” Tyrie said.

The select committee will take evidence from the CMA on 4 November about its ongoing investigation, which is running with a £4.5m budget and 25 staff.

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The CMA’s research found that Lloyds was gaining customers despite charging above-average prices and delivering below-average quality. Its Bank of Scotland arm is also rated as offering below-average quality and above-average prices, along with RBS, its NatWest arm, and also Co-operative Bank.

Smith rejected the idea that the CMA was not devising radical solutions. He pointed to the use of the government Midata scheme, which gives a breakdown of an individual’s data that can be plugged into price-comparison websites, as “a game-changing tool”. “We don’t think customers will truly benefit from a more competitive marketplace until they can compare accounts more easily and feel confident that they can switch without risk, and that is why our provisional remedies are aimed at giving customers control,” he said.

Building the IT capability for Midata is likely to cost up to £200m, according to an industry source, while the government needs to provide a protocol for the system to work effectively. Lloyds presented an idea to the CMA to use Midata to create a service that would make it as easy to compare current accounts as savings or insurance products.

The CMA also said there was a need for improvement to the seven-day switching service (CASS) introduced in 2013 in response to a previous investigation. Despite its introduction, only 3% of current account customers switched last year.

The watchdog’s investigation was launched amid heated political debate about the future of banking, with calls from the Labour leadership at that time for new challenger banks to be created and a market share test to be introduced.

Harriett Baldwin, economic secretary to the Treasury, said: “The CMA’s work complements the work the government has already undertaken, and continues to take, to increase competition in banking and create a fiercely competitive market which delivers for consumers and the wider economy.”